Three Effective Strategies for Managing Debt Repayment

September 25, 2019

It’s no fun facing a mountain of daunting debt. Besides the obvious stress and anxiety it brings, certain kinds of debt can leave you with a poor credit rating, meaning you might have difficulty borrowing money or getting credit cards in the future. No matter what kind of debt you’re dealing with, you’re likely paying interest too, making it even harder to wipe out what you owe.

If you’re in debt, try not to let it get you down. You can recover if you have the right repayment strategy, and the discipline to stick with your plan for as long as it takes.

Deciding which debt repayment strategy is right for you means understanding the kind of debt, or debts, you have. Credit card debt, also known as revolving debt, can be the most damaging. This is because the interest rates are typically so high, and because of the potential impact on your credit score. If you owe money for a student or personal loan, or on a mortgage, it’s known as installment debt and won’t affect your credit rating.

Personal preferences and psychology each play a large part in picking the right debt repayment plan. Read about three common strategies and see whether one of them can help you dig your way out of debt.

The Debt Snowball Method

The Snowball Method is a proven success story of debt repayment, with one important caveat: while it’s been shown to help people escape debt, it’s not the most financially savvy choice. With the Snowball Method, you make the minimum payment on each of your debts, then take as much money as you can and devote it to paying off the smallest balance. Once that’s wiped out, take that money and start putting it toward the next smallest debt. Like a snowball growing in size as it rolls along the ground, your payments grow as you move on to each new debt. As you rack up ‘wins’ by wiping out debts, you feel better about your situation and more motivated to keep going.

The downside? This approach doesn’t factor in the effect of interest rates. If you leave your biggest loan till last, and it has the highest rate of interest, you could be facing a mountain of debt by the time you start paying it off in earnest. Generally speaking, the Snowball Method is best for those who need the psychological boost of seeing evidence of their success along the way, and those with several small debts of a similar size and interest rate.

The Debt Avalanche Method

The Avalanche Method is a lot like the Snowball Method, but there’s a meaningful distinction. With the Avalanche, you tackle the debt with the highest interest rate first, then move on to the next highest once the first has been paid off. Compared to the Snowball Method, this approach should get you out of debt sooner while paying less interest.

Of course, if your highest-interest debt is also the one with the biggest balance, it’s going to take time, maybe even years, to pay it off. While it’s always nice watching a debt decline, there’s nothing as satisfying as wiping one out completely. If you’re worried about your motivation waning as you wait to achieve a debt win, the Avalanche Method may not be right for you, its benefits notwithstanding.

Debt Consolidation

Arguably the best approach to tackling debt repayment is consolidation: paying off all your small debts by taking out one big loan with a competitive interest rate and just one regular payment. Besides eliminating the aggravation of different payment schedules, consolidation is typically the best way to pay the lowest rate of interest on all your debts, especially if you owe money on your credit cards. Be aware of the impact of any costs and fees associated with taking out the loan, and make sure they don’t impact your bottom line too much.

Of course, securing a loan to pay off your debts can be difficult if your credit score isn’t strong. If this is the case, you may require the help of a debt agency to work with your creditors and put a repayment plan together for you.

Another potential pitfall of debt consolidation is the need for extreme discipline after you’ve used the loan to wipe out your credit card debt. At this point, it’s important to avoid charging more big expenses on your credit cards. You don’t have to cancel old cards – in fact, unless they have high annual fees, you’re better off keeping the account open as it will give you access to emergency credit and extend the lifespan of your account. Still, if you’re worried about the potential for a costly spending spree that puts you even deeper in debt, hide your credit cards somewhere safe or simply cut them up when they arrive in the mail.